Yahoo Finance This tax break is set to replace negative gearing in 2019
Only five months out from a federal election and Australians are increasingly looking to a future Labor government.
And with a suite of bold reforms planned, investors and homeowners are paying extreme interest.
“There will be a significant impact, both short term and long term…if Labor wins the next federal election,” wealth partner at HLB Mann Judd, Jonathan Philpot said in Sydney this week.
As Labor plans to limit negative gearing to new property developments, anxious property investors will seek out new ways to preserve their capital, he added.
“With the property market already going through difficult issues with the banks tightening on lending, limited access to interest only loans, and a general downturn in the property market, many potential investors are probably already on the sidelines,” he said.
Superannuation could be the answer
Personal superannuation contributions could become the next safe haven, Philpot said, noting that the main reason investors negative gear is to reap the tax benefits.
Australian adults can make super contributions up to $25,000 a year including the 9.5 per cent mandatory contribution paid out by employers.
As superannuation is only taxed at 15 per cent, this can provide a large tax deduction, Philpot said.
“Particularly for those over age 40, contributing more into superannuation for the primary reason of a tax deduction may be a sufficient incentive to lock money away until retirement.”
What about the property market?
Philpot argued the changes to negative gearing could take further fuel out of the already declining Australian property market, but it will bounce back.
“If a Labor win looks certain, there may be some short term support for the property market; however once changes take place we would expect to see further weakness in the property market.
“Over the longer term, if less rental property becomes available over time, we would expect to see rental yields increase, possibly even to the point where they start to become positively geared,” he said.
The arguments for and against negative gearing reforms
With a federal election on either 11 May or 18 May looming next year, there’s only a small window for Labor to pass their changes before the new financial year, so anxious investors could have another year to figure out their strategy.
Even so, the future is uncertain.
Yahoo Finance contributor and economist Stephen Koukoulas argues Labor’s plans could put a floor on house prices and prompt rental rates to fall.
He said it’s basic economics: if more investors are pushed to invest in new dwellings, there will be a greater supply of rental properties so prices will naturally fall.
On the other end of the spectrum, the founder of Aussie Home Loans, John Symond said the reforms will be a “nuclear bomb” for the Australian housing market.
He said it could even “tip the economy over”.
However, Symond last year said negative gearing could be improved upon.
“You can very easily say ‘Can it be improved?’ Yes, it can be. But it’s got to be in an orderly way where they tackle the whole of the tax system. It would be a mistake to do it piecemeal. They really do have to bite the bullet,” he told the Australian Financial Review.
Fellow Yahoo Finance contributor Michael Yardney is also stridently against negative gearing changes.
According to Yardney, Sydney and Melbourne’s markets will suffer slides of up to 9 per cent if Labor implements the reforms.
It will also make things more difficult for investors, he added.
“Investors will be driven to buy new properties, both apartments (which will generally be in the CBD) and houses (which are likely to be in the outer suburbs).
“Both these types of property make poor investments because of their locations and will make even worse investments as, once purchased, will instantly be established properties with a thinner potential resale market.”
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